America is being haunted by the ghost of 'stagflation,' the brutal combination of stagnant growth and high inflation that made the 1970s such a slog

• The ghost of "stagflation" is haunting the US as inflation stays strong and economic growth cools.
• Stagflation made the 1970s a slog and ultimately brought the post-WWII global economic system to an end.

The American economy was riding high over the summer as displaced workers found new jobs and consumer activity sharply rebounded. Wall Street also had it good, with major stock indexes rising for seven straight months.

But then summer turned to fall and the economic weather changed. The US labor market has slowed sharply and there are signs inflation might be here to stay. Now the country is barreling toward a situation last seen during the economic nightmare of the 1970s: the dreaded "stagflation."

Now the ghost of stagflation, a brutal mix of stagnant economic growth and high inflation - hence the name - is haunting the fragile recovery from the pandemic. The stagflation of the 1970s ultimately led to an overhaul of the entire economic system, and policymakers are desperate to avoid similar disruption after the coronavirus crisis.

Mentions of "stagflation" across company documents are at their highest level since 2008, data company FactSet found, even before third-quarter earnings season picks up. Bank analysts are churning out research notes on the topic.

If we are really headed for stagflation 2.0, it will be bad economic news for years to come.

Memories of the 1970s dog economists

Inflation has come in above 5% for the last three months in the US and jumped to a 13-year high in the eurozone in September. Central banks have spent most of the last year saying inflation should soon fade away, but they've sounded less confident of late.

On top of "temporary" inflation that is looking more permanent, the Delta coronavirus wave has slowed the roaring growth from earlier this year. The US jobs market slowed dramatically in both August and September. Supply crunches have led to surging energy prices, causing some factories in China and Europe to stop production.

For many on Wall Street, talk of stagflation sends shivers down the spine, bringing back bad memories of the 1970s.

It's no accident the '70s was the decade to give birth to gritty films like "Taxi Driver" and aggressive music like punk rock. The economies and societies of the developed world were convulsed by the perfect storm of high unemployment and rocketing prices that decade.

It was a shock after two decades of relative calm and prosperity after World War II, when governments actively managed their economies to try to keep unemployment low. After the deflation of the 1930s and the Great Depression, they were happy to tolerate price rises if it meant the jobs market was healthy.

The US and global economies went through a recession as oil prices surged and Richard Nixon changed the rules of international finance by unpegging the dollar from gold, which had been the bedrock of the financial system since the end of World War II. Despite slowing growth, inflation spiralled out of control, with price rises in the US soaring into double digits by the end of the decade. The oil-price shock, high levels of government spending, and unions pushing up wages were all blamed.

The resulting stagflation was a nightmare for households and businesses, and smashed the old way of thinking about economics. It ultimately led to a new set of ideas gaining influence, with governments and central banks (particularly in the US and UK) inspired by the economist Milton Friedman to slash government intervention and focus on controlling inflation. The new system helped bring back growth but laid the foundations for a new set of problems, primarily soaring inequality and the 2008 crisis in housing and finance.

Energy prices could make inflation stick around

The return of stagflation threatens to turn the post-pandemic period into a mass firefighting exercise. The signs are growing: The price of US oil has surged to a seven-year high and natural gas has risen more than 500% in Europe, causing analysts to reconsider earlier predictions that inflation would soon fade.

US stocks plunged in September and have had a rocky October as investors worry that inflation could stay high - eating away at their investments - even as growth cools. "Concerns about stagflation seem to have turned from niggling worries to an anxiety attack," said Susannah Streeter, markets analyst at broker Hargreaves Lansdown.

Yet there are hopeful signs. Analysts point out that economies around the world are still set to chalk up better growth rates in 2021 and 2022 than they've seen in years. And unemployment rates in advanced economies have stayed relatively low.

Even so, markets are jittery and the stagflation debate will stick around. Economists and traders will be digging through each data release for any whiff of slowing growth or persistent price rises - and praying that there's no return to the 1970s. The next decade is at stake.